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Pathways To Success - Business Models Part 2

icon-calendar 2020-12-30 | icon-microphone 29m 52s Listening Time | icon-user Joseph Ianni

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Good to have you here, we’re back with the continuation of our business model roundup from a few episodes ago. We’ve got 15 to do today, and another 15… not tomorrow… but soon. Closure is important to me. Now, before we move on, I want to address something that might be nagging away at a few or all of you, a lot of these business models may not have anything to do with what you intend to do, or that they don’t tie directly into ecommerce. So here’s my position on the matter, for one, this is free so… there’s that. Two, the theme we established from episode one is that e commerce is commerce, and commerce is trade, and trade is a fundamental human function. So while odds are you might not adopt a number of models from this list, what’s the harm in gaining a better understanding of the ecosystem in which you will have to cohabitate? Your business doesn’t exist in a vacuum, does it? Let us know, podcast@debutify.com


First up is Gatekeeper, the main source of this list is 4weekmba, but I make an effort to view content elsewhere to support the main article. Many of the large companies we talk about often, google, youtube, amazon, are considered gatekeepers, they are the middleman between the business, small businesses usually, and the potential customers. On 4weekmba the full list they provide in the example includes as well, apple, facebook, instagram, linkedin, tiktok, netflix, uber, spotify and pinterest. This would be a good example of a business I don’t expect listeners to create from scratch, though don't hesitate to surprise me. These are however, key to our success. The concept of a gatekeeper goes back a long way, a book publisher or movie studio would be the deciding factor between one’s success and failure. One can understand the necessity of a person whose job is to filter potential working relationships, because they wouldn’t have the resources to accommodate everyone, and also they’d want to ensure the people they do spend resources on would be successful. While they’re still around, especially in big budget film for instance, they no longer have dominance over an industry, now that creators can receive funding directly from their audience, for instance, the role of gatekeeping can be relegated to the masses. There is also a semi relevant variation on gatekeeping, which is within a company. So if I’m reaching out to an organization, receptionists and secretaries act as gatekeepers in that they know what the managers have to focus their time on, and as a result do filtering on their behalf. According to indeed.com, there are four highly popular, relevant gatekeeping trends; search engines, social media, influencers and gatekeeper marketing, all of which tie in to the companies listed. Indeed goes on to describe how each one is a relevant gatekeeper; Search engines filter information, they’re aim, in theory, is to rank the best results at the top leading users to better information. We combat this with good SEO, so that it's more search friendly. Social media turns it over to the masses, each person having a say in whether or not content will be shared to their other friends on the platforms, we address this in two ways, by being in full control with our own social media presence to keep the trolls at bay, and to provide content that people will want to share organically. Their point on influencers I must say, surprised me, because usually when I hear the word influencer I think of instagram influencers, which are also gatekeeping in their own way, but indeed.com points out that there are junior employees whose job is to research potential options for a manager or executive. If you made it past the receptionist, they’d be the next level before you face the boss. When they say gatekeeper marketing, they are keeping receptionists and assistants in mind when they come up with a proposal. As you can see, the term means a lot of things, and a more fundamental approach would be to think of them as filters or curators. One more takeaway before we move in, there is a key part of this we need to keep in mind, it’s easy to think that a gatekeeper, relevant to our purposes, is just a roadblock from our success; but if you refer to the list of big players, the one thing they all have in common is they generated the resources for us. Facebook gave us the user base...and their data… and so it’s only fair that we have to play by their rules. 


Next up is Heavy Franchised Business Model Now, from the last set, I spoke about how McDonald’s is a blend of franchise and company operated. Now, here’s something new I learned having...gone further down the list. In 2018, the total amount of McDonald’s that were Company operated were 2770, the total that were franchised out were 35085. While not totally important to explaining how this works, I do want to report that there is a decline in revenue from 28 billion in 2013 to 21 billion in 2018. In that time, we have seen a resurgence in new food options, uber eats, or those DIY boxes where you get the ingredients and have to make the meal yourself. While there's plenty of content regarding franchised business models in general, finding one that qualifies as a heavy-franchised one was a bit trickier, but I managed. These additional insights come from marketrealist.com, who took a look at Papa John’s International, who by the end of 2014, the company had 735 self owned restaurants, and 3,928 franchised ones. Here’s the process. The company, Papa John’s, examines the business background, previous restaurant experience and finances before approving the application. Then the prospective franchisee goes through a training program themself, or they get an operator who would also have to be a shareholder, or at least someone who could gain equity in the franchise. Put another way, someone who stands to gain a return beyond just a paycheck. Assuming everything goes well, the franchisee pays 25 grand for the first restaurant and 5 grand for any additional ones, then 5% of the sales to the company in royalties. It gets more granular as well, if it’s an international agreement, but I think the point here has been made, franchises are a major investment of both time and money, but the brand recognition gets people into the store. 


The next one is a mix of a business model and a philosophy, it’s The Humanist Enterprise Business Model. 4weekmba associates this with one, Brunello Cucinelli, who’s fashion business is based on three key pillars, as the article puts it: Italian Craftsmanship, Sustainable Growth, Exclusive Positioning and Distribution. The first two we can intuit just hearing the word, but let’s focus on the distribution strategy: Here are three main channels: Retail distribution channel aka direct distribution channel by way of directly operated stores. Wholesale mono-brand channel and wholesale multi-brand channels. Retail takes 55 %, Wholesale Monobrand is only 5% and Wholesale multi brand is 38% of the revenue. The philosophy side of this is what you can read up on at length if you go to investor.brunellocucinelli.com as I have; he says and I quote “I envisage humanistic capitalism as a great harmony within which profit, giving back, guardianship, human dignity and the ethics of truth coexist and enrich each other.” The first thing I was wondering about this man’s story was if he had accumulated wealth before being able to create this business venture, and what I learned is he had received a loan from investors simply by the quality of his character, which he had cultivated over the years of being raised on a farm. Let’s review the tenants of this philosophy and ask ourselves, what can we do to uphold this idea? He speaks of moral and economic dignity, paying each person a wage they can live and thrive. One can understand the pushback of someone just trying to look at the numbers and say “you pay people based on the value of problems they solve.” And it’s correct, but to grant people a higher wage is to go above paying someone to now and investment in someone, a higher wage on average promotes better work ethic, secures loyalty and improves the person’s quality of life. They talk about trying to live in harmony and without harming creation, which I think is going to be difficult to fully implement but one should still try. We need to harm living things in order to eat, whether that’s a plant or an animal, but what we can do is limit suffering and be grateful for what we’ve been given. They speak of a workplace that heightens one's dignity, preferring a setting where they can look at the sky and landscape, maybe their house is off in the distance. Of course this particular tenant is more in the hands of the worker now, but a shared working environment, made under the right circumstances with the right people is a wonderful thing I’d be happy to commute to. They speak of fair working hours, which is making sure if people are pouring their soul into something, they do it on company time. While Brunello Cucinelli was the only example provided by the main list, I did recall seeing another story that operated along these lines; If you look up the story of Dan Price, he was confronted by a harsh realisation that one of his employees at Gravity Payments, a credit card processing company, said to Dan’s face that he was being ripped off, Dan hadn’t considered that his own financial discipline meant other people were only getting by. There is a long, causal chain reaction of why things were this way, his own business was nearly wiped out due to the economic recession at the time, so one can understand his own protective policy. In response to this revelation, he started raising wages. He found that, when he implemented the 20 percent raise in 2012, that year his profit growth was as much as last year, due to the increased productivity. There’s more to the story, including the fact that his brother sued him over this. So far, his decision to take a massive self pay cut and dramatically increase the pay for his employees is going well, and is inspiring others. And one doesn’t necessarily need to justify it from a moral perspective, not that there’s an issue with that or anything, but one can justify it from a pragmatic perspective, happiness creates energy and that energy turns into productivity, so if people are paid enough to make them happy that’s a pretty good investment. 


The next one up is the Enterprise business model built on complex sales. The first insight from this section is that if you look at CAC, the lowest cost would be a viral marketing campaign, intended to disseminate through online channels through user interaction, the chart assesses it can be as low as a dollar, whereas more atypical marketing would be 100$, in both those cases, the target is a consumer. In the center is a dead zone where small businesses reside, in here, the difficulty of targeting them is that money needs to be spent, but they themselves only have so much capital, and their ceiling remains low until they become a larger enterprise. Then the chart switches from marketing to sales, as in, cost to acquire sales from other businesses, the low end is 10k and the high end is 10 million. It would cost you tens of millions of dollars to acquire sales contracts with big businesses and governments. The central tenant to this business model is, you’re shooting for the top of mount olympus, and there’s nowhere along the way that’s an acceptable destination. Businesses that take on high profile clients need high profile sellers, and as such attract the most capable agents on the market. According to lucidchart.com, the first main tenant of this to understand is that, in spite of the scale of the work involved, it’s a highly personal relationship, involving trust and attention. In short, complex sales is also referred to as enterprise sales. The article goes on to draw a distinction between the two, an enterprise sale is characterized by high risk, many stakeholders, a long sales cycle of upwards 6 months, high investment and complexity. A transactional deal is low risk, few stakeholders, a short sales cycle, sells single products and services and is marketing driven. It’s evolved over time; in the 50s it was a scripted “tell you what you need” approach, in the 70s it was more about listening to the client and developing solutions based on what they say, now it has continued to build that idea into more of an advisory position. So imagine a doctor listening to someone talk about their symptoms, and only prescribing medication to deal with the symptoms, then picture a doctor who identifies the underlying causes of the symptoms, and prescribes solutions to the root problem, which may also be medication but I don’t know I’m not a doctor. The article continues by breaking down a four step process to this; first is discovery, a questioning process where the rep talks to the client to find out what the issues are and what variables are involved. You then go to diagnosis, which I didn’t realise was the term until after my doctor analogy, I swear! This is where you’ve taken the time to process their provided insights and begin figuring out what your company can do to solve their problems. Then there’s design, where you have a dialogue with the potential client to determine the solution together, as no two client’s will be the same. And finally delivery, keeping in mind, you’re obligated to continue to track and measure progress as things come along. 


The next one is a continuation of what Twitter is up to, it’s the Instant News model. Assisted by the 2017 increase of 280 characters over 140, Twitter’s immediacy has given it two edges in news distribution, it can immediately report the news, and users can receive it right away, it can also be the news, as high profile users can make announcements on it, such as: they’re leaving twitter. 


Next up is a lock-in business model. This is where purchasing a product puts the customer in a position enviable to some, frustrating to others. That position is when a consumer purchases a product or service that disincentivizes them from using competing products somewhat or entirely. The example they cite is Apple, in that their in house devices pair perfectly with one another and the complimenting software but don’t get along so well with other non apple devices. Some people may appreciate the ease of use, having a whole apple ensemble can be effective and efficient, so it depends on the inclinations of the individual. My observation is the Apple products are meant for mostly front-end users both for work and leisure, where backend users will more likely gravitate towards smartphones and windows or linux. One upshot to this is that some apple services like apple music are still accessible from the outside world, and so users can get a sense of the company’s mo in terms of aesthetic and functionality. According to their 2019 annual report, apple’s revenue streams are 17% services, 54% iphone purchases, 9% iMac, 8% iPad and 9% wearables/home accessories. The wearables and home accessories are their most recent success, with an increase of 12 billion dollars in revenue between 2017 and 2019. A few other examples that come to my mind include video game consoles, it’s taken a long time for cross-play to become the accepted norm, for the most part, purchasing a console means committing to the value of it, subscribing to adobe create suite boosts productivity if you’re using the softwares to support one another, using google services encourages the user to use other services again due to cross pollination. Personally, the weakness I have experienced with this kind of model is the feeling of missing out, or in one case knowing full well I was missing out. When I subscribed to the creative cloud, I was constantly in a state of self loathing because I didn’t maximise the value, I barely broke even. It can be frustrating to a customer to want to use a service, and have the other aspects of the service gnawing away at you, like using words and expecting to have to use the whole office suite. Or having a membership to a fitness gym and only taking spin classes. I believe the seller should be the one always looking for ways to provide value to the customer, and not put pressure on the customer to find it themselves. 


Following that we have Management consulting which points to Accenture and I have to say, the scale they operate at is a lot larger than I would have expected, globally, they have approximately 425000 people in the company. Their revenue is split among five operating segments, 21% financial services, 17% percent health and public service, 27% products, 13% resources and 19% communications, media and technology. Accenture is considered one of the most successful consulting firms in the world, and on top of that also provide information publicly as a way of providing for the net good, and enticing prospective clients looking at the website, if this is what they’re giving away for free, what can they do for me at a premium? Consulting, I should say, is a great resource anyone with expertise in their field should be willing to wield. In my time as a freelancer, I would offer my consulting services for free, frankly, I enjoyed it. Gives me a chance to sit with someone in a no pressure setting and enjoy a fresh conversation where I have a lot to offer. I was always happy to do it just for the experience, and in many cases it would end up a business arrangement down the line. No matter what, consulting is a great tool in your arsenal and I couldn’t think of a reason not to offer it, so long as you make it worth your time. 


Market-maker model ties in to the feeder model we discussed last time, again referring to UBER with this one. Let’s go over it here as it is referred to as a flywheel effect, uber supplies the platform and drivers hop on board, the drivers lower the wait times and fares, which leads to more riders, more riders per hour means higher earnings potential for drivers which leads to more drivers, completing/perpetuating the cycle. This would also be the time to note that dynamic pricing is also factored in to this operation, in a static price point, or “flat rate” the price is the same no matter what, if all uber rides had the same price per distance regardless of time and proximity to major population, you would see an effect where certain situations it’s too expensive to use, but other times where it’s an absolute steal. As a freelancer I would do flat rate, which put the pressure on me to be as efficient as I could with my time so that I could have a higher average hourly rate. Uber on the other hand uses dynamic pricing based on peak times of service and customer segmentation, so that way the users have to consider the cost of convenience, if a live show lets out and about 1000 people need rides, in a way it functions like a market where the supply and demand are in constant flux, as it should be. 


Multi-brand business model is an interesting story laid out here, 4weekmba tells of a war between Kering Group and LVMH, both of whom wanted Gucci. What’s surprising is that neither company were luxury brands to begin with, Kering was into lumber trading and LVMH were in construction. Kering eventually won out and took over Gucci, LVMH ended up acquiring Fendi. Both these French companies have a large set of brands they oversee. On one side, their multi-brand strategy uses some centralization; brand collaborations, economies of scale, supply chain and branding initiatives. Other elements are more decentralized, individual brand decision making and fostering creativity. The part that surprised me about this is I always expected luxury to beget luxury, but in both these instances, the liquidity they earned from their trade based operations allowed them to purchase these brands at all. 


We could certainly find a lot to say about the Multi-business model, the example listed here is Amazon, who’s pillars are their first and third party selling platform, their advertising, AWS, and prime. As a consumer, it may not seem obvious what business Amazon has selling Cloud Storage to the same people they’re selling kindle books to, but that’s because they aren’t. It’s more a case of, this service is something they’d need to use for themselves anyways, so they might as well provide it publicly, and as we’ve said before it’s a revenue stream for them with a lower profit margin, as a digital service it’s easier to markup.


Linkedin, a social/professional network is an example of a Multi-sided platform, where the business supports two distinct groups of people who are in need of one another. On the one side you have the professionals, looking to get hired, are incentivised to join Linkedin to gain connections and find a job in their career field, but Linkedin can offer them learning and development programs. On the other side are HR managers, who scour Linkedin for the best candidates, Linkedin offers them hiring services. A small but still notable benefit to Linkedin is that conduct is important, I’ve read online about people using linkedin to ask people out on dates and it was frowned upon. Personally, I think it would be hilarious if there was a dating option since professionals may want to date one another, call it “power coupling” if you need to. 


We’ve talked about Lyft and Uber on the first part, and how they are feeder models, and also spoke about Uber in the mark-maker model, Multimodal was on the verge of being a tongue twister for me, but I made it out. So Lyft is the example used in multimodal, where one platform offers different variations on the service; so we know the advantage riders have not needing to invest in a vehicle which is a large cost, and that drivers can earn additional income to offset the cost of the car, and we also know people can even own vehicles specifically for others to drive on uber, lowering their costs even further. The multimodal part of this is that Lyft is also providing bike sharing and electric scooters, with autonomous cars being the next major breakthrough coming down the pipe. Another approach to this would be to consider Uber’s subscription service, according to an article on hackernoon.com, Uber’s main goal has, along with Lyft, to be able to provide a cost effective and time efficient alternative to owning a vehicle, thank goodness for them too I might add. I just opened my Uber app to confirm what I read on hackernoon, and it doesn’t exist yet in Canada, not being a frequent Uber user myself (public transportation is still pretty good in Toronto) and they’ve expanded into grocery delivery as well as restaurant food and of course their usual bread and butter. The subscription service, launched in the US, is multimodal in that they wanted to diversify the revenue stream, by creating a value proposition for the user, it opens up part of their market to a more cost effective method based on their usage habits and revenue. One question I think is important to ask, for the sake of clarification, is Amazon multi-modal? The answer is yes, but I think the point here is to hone in on an application like Uber and Lyft where all the variations are in one place. I go on to amazon.com for shopping and it takes a bit of intuition to seek out AWS not knowing about it before. You’d have to scroll all the way to the bottom and squint a bit to see the other services, not exactly promoted front and center lik uber groceries. 


Multiproduct or Octopus business model is next up, and the implications of an octopus suggests that, while there are many end points, there is something that keeps them together. The example they provide is OYO, which is a living space aggregator, specializing in hotels but also services private townhouses and vacations. They’ve expanded in to a number of other services but you’ll see that they’re all connected under the same umbrella; YO HELP, a self help tool that supports check-ins, check outs and payments, OYO Life which aims to provide millennials and young professionals with homes and private long-term rentals, collection O providing booking and renting services to business travelers, Palette which focuses on staycations, Silverkey which provides services to corporate travellers, and Capital O which provides booking services. You can see how, they’re able to provide support to other hotel company’s at a price, turning over some revenue even if they don’t themselves own the property… Yet..


On-Demand is next on the list, and it refers to NetFlix, and we’ve discussed previously on our backend episode, Netflix has a negative cash flow because it continues to invest in licensing and original content. It should be mentioned that in 1997 the genesis of netflix was to mail dvds, but this was on a fixed schedule and didn’t fully integrate on demand until later. On demand, at least as far as TV goes has changed a lot of the way TV content is created. I grew up watching TV and always expected commercials, but writers had to keep these commercial breaks in mind and create dramatic moments or “act breaks” so that there’s enough investment on the viewer to carry interest to the other side. Original series on Netflix or Youtube Red are not created with commercials in mind, so there’s more of a flow to the storytelling. Dramatic TV, aka dramas have a job to do, at the end of the episode something important has to happen to hook viewers on to the next episode. Now, if a show is being written and they’re expecting viewers to be back next week, the hook needs to be strong and it gets people talking about the show in between episodes (multiply this by 10 for season enders.) However original programming often will simply release all the episodes at once, so the hooks are still there but because there’s so little downtime it changes the impact of these hooks. What’s suddenly critical is what they do to close out a season, as that will need to carry people for a year, longer depending on the still murky waters of online media distribution. I bring this up because it’s important to acknowledge that at first, on-demand is seen as a way for people to get content they’re used to viewing one way, but once they’re engaged in the format, that’s when the format itself will create new demand and new expectations. You can always tell when I’m weighing in personally on something, and that was no different. I felt it was important to take a 30k foot overview, if you go to trendhunter.com, there is a massive list of on demand services, including but not limited to: flowers, fuel, ice cream, manicures, doctors, booze, groceries, which my partner and I tried recently and had a great opinion on, lawn care, nursing, kittens, tacos, tutors and locksmiths. 


The last one on the list for today is more feel good than I expected, I was just counting to 15, we have the One for one business model. This is the kind of humanitarian business model that creates profitability and contributes to the net good in a big way. The first pillar, the consumer buys a pair of shoes off the website, and TOMS shoes sends another pair to kids in developing countries. It gives customers a positive feeling for one, but also makes them natural advocates for the company so whenever says “hey Joseph! I see you’ve put on shoes today!” I can say “Even better! This time! I helped someone else put on theirs!” The affiliates are the second pillar, who by promoting the business, they earn money knowing they’ve helped get shoes to kids in need. The third pillar, the NGO, expands its operation by providing the distribution for TOMS shoes. So on the one hand, one supposes the profit margin is lower because you can only sell shoes for so much (still a lot mind you but everything has a cap) so the fact that one purchase leads to two costs means the profits are razor thin. On the flipside, marketing is where TOMS shoes can thrive, because customer word of mouth is so passionate. The bottom line is, and you can see how it refers to earlier about human capitalism, doing good is profitable. Think about it. 


Whew, another chunk of them down. Continued credit to the megalist provided by four week mba. We’ll have one more episode to go before we can wrap this up. As always, your feedback is treasured, so contact podcast@debutify.com, talk soon. 


Written by

Joseph Ianni

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